Commercial Management

1. Commercial Management in Construction Projects
29th August 2014
1
- Ramesh Palikila BTech, MIS, FRICS, FAIQS

4. AGENDA
1
Why Commercial Management?
2
Role of a Commercial Manager
3
RICS – APC Reading List
4
Questions & Answers

5. 1. Why Commercial Management?
• Need for Effective Cost Control System
• Identifying Past Trends and Forecasting Future
• Identifying Deviations from Budget
• Risk Management
• Late Completion
• Cost Over Run
• Suspension
• Termination
• Successful closeout

6. Objective of Commercial Management in Construction
6
Commercial Management is defined as:
"The identification and development of business
opportunities and the profitable management of
projects and contracts, from inception to completion." -
ICM.
“The main objective of Commercial Management is
to see how commercial competitiveness balances
against profitability with through understanding of
the financial processes used to achieve profitability
and how these can integrate with the overall
delivery of the project “.
.

7. A) Need of Commercial
Management in Construction
B) How commercial
competitiveness balances
against Profitability?
C)Financial processes used to
achieve Profitability
D)How Financial processes
integrate with the overall
delivery of the project

8. 2. Role of a Commercial Manager
• With Contractor
• Review and Verification of Estimates, Preparation of / Response to
Tenders / Commercial Proposals, Drafting Contractual / Commercial
Correspondence, Identification & Management of Commercial Risks,
Linking with Procurement Team, Contract Administration &
Negotiation of Changes, Analyzing Costs & Profit for Project /
Business, Cost Control, etc.
• With Consultant
• Estimating, Cost Planning, Budget Preparation, Risk Management,
Value Management, Value Engineering, Benchmarking, Life Cycle
Costing, Procurement, Tender Evaluation, Change Control,
Assessment of Variations / Claims, Preparing Financial Statements,
Cash Flow Forecasts, Cost Control, Reconciliations, Interim
Valuations, Final Account, etc.
• With Client
• Managing Budgets, Change Control, Preparation and Management
of Tender / Procurement Process, Identification and Management of
Commercial Risks, Contract Administration, Cash Flow Forecasts,
Payment Certification, Final Account, etc.

9. Employer/
Developer
Project
Manager/
Engineer/
Consultants
Contractor
Commercial Manager role in
9
Sub-Contractor Suppliers
Specialists
B] Role of Commercial Manager
In any industry, the role of a commercial manager is to maximize the potential of a
business in terms of profitability. The manager monitors, or controls, internal
processes such as production, and manages external relationships with
customers, clients and trading partners.

10. 3. RICS – APC Reading List
3.1 Estimating and Establishing Budgets
3.2 Cash Flows
3.3 Reporting Financial Progress
3.4 Procurement of Labour, Plant and Materials
3.5 Procurement of Sub-Contracts
3.6 Financial Management

11. 3.1 Estimating & Establishing Budgets
• Components of Budget / Estimate
• Effect of the Design and Construction Processes on the Cost
• Estimating Techniques
Unit Method
Superficial Method
Elemental Cost Plan
Comparative Cost Plan
Approximate Quantities
• Operational Estimate
• Estimator’s Report

12. Estimate
An approximation of the cost of a construction project or
operation, produced to progress the project to the
construction phase. By its nature, this is usually
produced pre-construction and pre-contract.
Budget
(also ‘budget to build’ and ‘post- tender budget’).
An evolution of the estimate, updated to reflect information
not available when the estimate was first produced; an
estimated plan of the cost to complete the project from the
contract award, based on the project team’s planned
procurement and delivery methods.
The budget should be continually updated until project
completion.

14. Estimates of regular items are
common in our practice.
Let us see
Estimation of Preliminaries
• Factors to be considered in
Estimation of Preliminaries /
General Requirements
• Documents to refer while
preparation of preliminaries
• Model Item : Elements to
consider to estimate the cost of
running a Site office .
14

16. 3.2 Cash Flows
• Types of Cash Flow Forecasts
• Use of Cash Flows
• Preparing Cash Flows
 Effect of Valuation Methods
 Effect of Contractual Procedures
 Curves & Formulae
 Adjustments to Cash Flow Forecasts
• Monitoring, Analysing, Reporting and Advising on Cash Flows
• Financial Implications and Appropriate Management Actions

17. Project’s Cash Flow based upon the formulae and provides the flexibility to
specify how additional factors are handled including:
1.Retention
2.Defects Liability Period
3.Preliminaries –running costs to be valued on a ‘work done’ or ‘time related’
basis.
4.Lump Sum items – enables the user to specify when specific expenditure will
occur – particularly useful for a particular piece of equipment or a specific sub-
contract.
4.Advance Payment – when advance payments are required the user may specify
the amount, the date of payment, the date to start retrieval and the period over
which retrieval is required.
5.Actual Payments – once the contract is underway Actual Payments may be
inserted thus allowing a comparison with the Initial Forecast and Revised
Forecasts to be produced.

18. 3.3 Reporting Financial Progress
• Techniques to Reconcile Cost against Income
• Collecting of Data for Reports
• Preparing Reports
Cost to Complete (CC)
Cost Value Reconciliations (CVR)
Contract Variance
Earned Value Analysis (EVA)
• Monitoring, Analysing, Reporting and Advising on
Profitability
• Financial Implications and Appropriate Management
Actions

20. 3.4 Procurement of Labour, Plant and Materials
• Supply Chain
• Labour Costs
• Material Costs
• Plant Costs
• Overhead & Profit
• Units of Measurement in BoQ

21. 3.5 Procurement of Sub-Contracts
• Domestic Sub-Contractors
• Named Sub-Contractors
• Nominated Sub-Contractors
• Techniques to Financially Manage Sub-Contractors /
Suppliers

22. 3.6 Financial Management
• Efficient Data Management
• Efficient Change Management
• Value Management / Value Engineering
• Efficient Management of Sub-Contractors & Suppliers
• Risk Management
• Cash Flow Management
• Effective Cost Control

23. MODEL VALUATION
FORMATS
Implementation
of agreed formats
for interim
valuations for
effective post
Contract
Administration
Proactive
Approach to
design and agree
Valuation formats
with Clients in
the beginning
stages
Successful
closeout of final
account with
minimum conflicts

25. Main Contents in Payment Certificate
o Value of Works completed based on progress
o Value of Works completed in Agreed variations
o Advance Payments
o Recovery of advance payments
o Materials on-site
o Material off-site
o Retention amounts
o Agreed and approved Claims
o Previous interim payments paid
o Applicable LDs

26. COST VALUE RECONCILIATION FOR CONTRACTORS
In Building and Civil Engineering Works, the preparation of
Construction Contractor’s Cost – Value Reconciliation (CVR)’ is an
important tool in tracking the ‘financial health’ of construction
projects and early identification of potential commercial
problems.
Aims & Objectives :
•Show Profit/Loss on each individual contract on a monthly basis
•Show Profit/Loss for the current accounting period
•Current cash position of the company
•Ability to identify/action and reduce cost liabilities on a monthly
basis
•Plan company expenditure
•Monitor and adjust estimating rates based on the profit/loss
reporting.

27. What are the components of a financial report?
 Contract Reference
 Package name and reference
 Budget associated with each contract / package
 Contract Price
 Instructed variations (agreed / not agreed)
 Anticipated variations (forecast)
 Claims / EOT
 Forecast Out-turn Cost
 Expenditure summary
 Financial Status -Cumulative and for this month

28. Key Features of a Partnering Contract
• Collaborative approach
• A partnering charter signed by all the parties involved highlighting
the spirit of team work
• Provision for KPIs to measure project progress
• Non-adversarial nature of contract
• Provision of early warning signs and the mechanism for review of
problems and resolution of same
• Provision for Value Engineering
• Provision for incentives for the proposals that helps in reducing
the cost.

29. 29

30. ANALYSE
RISKS
SELECTION OF
RIGHT
PROCUREMENT
STRATEGIES
GOOD
NEGOTIATOR
MARKET
ANALYST
BEST
COMMUNI
-CATOR
LATERAL
THINKING
BROAD
PERSEPECTIVE
Special
abilities of
Commercial
Manager

31. Special Skills of Commercial Manager
( Cost , Time , IT, Communications, Management , Leadership)

32. Main Reading List -Commercial Management in Construction
 Estimating & Establishing budgets
 Cash flows Reporting financial progress against budget
 Preliminaries Bills - understand the methods of costing Preliminaries items
 The method of costing management and Supervision
 Value Engineering and Value Management
 Life Cycle Costing
 Financial management and Reports
 Financial management of sub-contracts and multiple projects

33. Model APC Questions : Commercial Management in Construction
THANK YOU AND WISH YOU ALL THE BEST